Canadians owed $1.65 for every dollar of disposable income in the first quarter of 2016, according to Statistics Canada. However, retirees don’t seem too worried about their level of indebtedness. In fact, for some clients in this demographic and their financial advisors, the solution may be to manage rather than eliminate debt – at least, regarding a mortgage.
“[Canadians are] going into retirement with mortgages and unsecured debt, and thinking this is just a lifestyle choice that they’re making,” says Laurie Campbell, CEO of Toronto-based Credit Canada Debt Solutions Inc.
Still, there are several things advisors can do to help their senior clients avoid getting swamped with debt – from stress-testing budgets to having serious conversations about credit cards.
Maintaining a lifestyle does indeed seem to be top of mind for many Canadian retirees. According to a survey conducted this year by Toronto-based HomEquity Bank, 86% of Canadians aged 55 and older said they would not give up doing, achieving or acquiring something in order to leave a large inheritance.
Furthermore, suggests Yvonne Ziomecki, a senior vice president, marketing and sales, with HomEquity Bank, seniors are using their homes as a means of funding their retirement. “Canadian seniors are willing to tap into the equity of their home to help finance their lifestyle,” Ziomecki states in a news release detailing the survey’s results.
Another HomEquity survey found that older Canadians are carrying more mortgage debt in retirement. According to a survey on debt and retirement conducted jointly by HomEquity and Toronto-based Equifax Canada Co. in 2015, 16.5% of survey participants aged 55 and older were carrying a mortgage in 2015, an increase of 10% from 2013. Furthermore, the average balance on a mortgage for Canadians of that age group grew by 11% to $176,000 in 2015.
Longer time horizons
The research reveals two other reasons why Canadian seniors seem to be unconcerned about their rising debt payments. The first is longevity. As people live longer and remain healthy into old age, they tend to believe they have a longer time horizon for investments. The second is a sense of confidence inspired by low interest rates.
“[Seniors] don’t see their time frame and time horizon as being as limited as seniors 30 years ago would have,” says Tina Tehranchian, branch manager and senior financial planner with Assante Capital Management Ltd. in Richmond Hill, Ont. “That kind of encourages people in their 60s and 70s to have a longer-term outlook, which allows them to take on more risk.”
In some cases, seniors may be justified in feeling comfortable taking on some debt in retirement. For example, taking out a mortgage to buy a rental property can help generate income for a retiree.
Still, seniors must be careful not to “throw caution to the wind,” says Tehranchian, and must make sure that they can continue to afford such debt should circumstances change. Tehranchian likes to stress-test clients’ budgets to see if they could withstand interest rates that are three percentage points higher than the going mortgage rate. Says Tehranchian: “That [exercise] usually is a wake-up call for a lot of people.”
At the same time, Sue Neal, regional director with Winnipeg-based Investors Group Inc. in Toronto, says clients should not be so afraid of debt that they fail to save. For example, while paying down a mortgage before retirement is important, that should not be done at the expense of more general savings – especially while interest rates are low. “We have to find a happy medium that meets somewhere in the middle,” says Neal, “where you’re going to have enough of a retirement nest egg, but you’re not going to be left with a sizable mortgage that you find overwhelming.”
Homes viewed as nest eggs
Part of the reason clients should not focus only on mortgage reduction leading up to retirement is that they might not be willing to sell their house once they retire. “A lot of people go into retirement thinking, ‘My home is my nest egg’,” Campbell says. “And the reality that we see over and over again is people don’t want to leave their homes.”
That suggests that you consider having the potentially difficult talk about the cost of continuing to live in a home, such as property taxes and general maintenance.
Although there may be room for mortgage debt in a retiree’s budget, one type of debt that should be avoided is unsecured debt, such as credit card balances. Says Tehranchian: “Payday loans and credit card debt are a no-no. That is bad debt.”
Neal suggests you start a conversation when you see a client’s budget beginning to slip. Simply asking clients if they feel they are in trouble or are struggling with debt can kick-start the conversation.
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